US President Donald Trump's threat over the weekend to raise tariffs on Chinese goods took traders by surprise as Chinese oil refiners had begun increasing purchases of US crude and readying US LNG supply deals, in the run-up to final trade negotiations.

US crude cargoes were being arranged for July delivery even as Trump's tweets roiled global markets Monday, with traders saying it was difficult to ascertain whether the threats were just rhetoric or an official stance ahead of this week's US-China trade talks.

Asian equity markets plunged and Brent crude futures were down more than 2% Monday amid speculation that a Chinese trade delegation's trip to the US due Wednesday could be canceled in response.

"The Chinese team is preparing to go to the US for negotiations," Geng Shuang, a foreign ministry spokesman said at a news conference Monday, state media reported. But Geng did not specify whether Vice Premier Liu He, the point person for China in the trade talks, will still join the delegation.

He said similar situations had occurred in the past when the US threatened to impose more tariffs but China's position on the matter has been clear, with 10 rounds of trade talks having made progress in recent months.

A senior executive at a Chinese state oil company, who declined to be named, said the trade talks would be impacted as the discussions had become complicated and affected China's standing amid Trump's escalating rhetoric.

Executives from state-run oil and gas companies were scheduled to be a part of the delegation accompanying Liu to Washington on Wednesday, with issues such as trade barriers faced by US companies in China on their agenda, the person said.

On Sunday, Trump tweeted that the 10% tariffs on $200 billion worth of Chinese goods will go up to 25% on Friday, and an additional $325 billion of Chinese goods imported into the US "remain untaxed, but will be shortly at a rate of 25%".

If the tariffs were imposed, retaliatory action by China will mean that US crude and LNG flows into China attract a reciprocal 25% tariff. China does not currently impose tariffs on US crude imports, and implements a 10% tariff on US LNG.

US tariffs are usually implemented around 2-3 months after the initial announcement due to a follow-on consultation process, but the lack of an official statement meant the implementation process remained uncertain.

CRUDE FLOWS AT RISK

Unipec, the trading arm of China's state-run Sinopec, bought two cargoes of US crude for delivery to China in late April and early May, its first such imports since September when purchases stopped due to trade tensions.

Sinopec has just completed its crude purchasing schedule for July arrivals, and the Sinopec Hainan refinery has secured 1 million barrels of US crude for July delivery, a refinery source said, adding that if China imposed tariffs before the shipment, the refinery may send it into bonded storage.

"If the government adopts a tit-for-tat tariff approach and imposes additional tariffs on US crude, we may have to switch back to using West African crude," another source with a Sinopec refinery said separately.

Analysts said reciprocal tariffs by China will hurt the country's oil importers as they face higher feedstock costs than Asian refiners not affected by the trade war.

Additionally, the US has already narrowed China's options for crude oil sources with sanctions on Iran and Venezuela, while China's crude appetite is still increasing with new refining capacity coming on stream in the next two years.

LNG DEALS IN QUESTION

LNG traders said markets were well supplied, and US LNG could be easily substituted with supplies from Australia, Qatar and Russia.

If trade talks fell through, the impact will be on Chinese investors in US LNG projects, such as a proposed long-term deal between Sinopec and Cheniere Energy.

Before the trade war, state-owned PetroChina signed two 25-year supply deals with Cheniere for about 1.2 million mt/year of LNG, and CNOOC also had contracts with portfolio suppliers that partly sourced LNG from the US.

Both CNOOC and PetroChina have been forced to swap US cargoes for non-US cargoes to avoid tariffs in recent months, sometimes at higher premiums, and because of the weak US-Asia arbitrage, market sources said.

"China may have to pay premiums here and there to secure certain volumes," Kang Wu, Asia head of S&P Global Platts Analytics, said, adding that if a trade deal cannot be reached, trade for several commodities could be severely limited though volumes will vary.

Last month, a CNPC subsidiary and CNOOC, signed binding agreements for 10% stakes in the Arctic LNG 2 project by Russia's Novatek, signaling China's tilt towards Russian energy supplies amid uncertainty in the US.

-- Cindy Liang, Oceana Zhou and Eric Yep, newsdesk@spglobal.com

-- Edited by Dan Lalor, daniel.lalor@spglobal.com